Trading Plan for 10/22

[pay]Pattern notes.
You might think there would be a lot of new items to discuss following a 45-minute, 22-point plunge. There really isn’t, not since the plunge was in-line with the pattern’s objectives. No, there wasn’t a call for this – at least, not a plunge – but all the relevant characteristics were already in the market.

– Tuesday afternoon had never justified the morning’s reason for not rejecting the inappropriately timed selling. Perhaps now we know why, to create pent-up buying pressure. Regardless, sellers needed a close under 1091.50 to retain whatever traction they had gained Tuesday. The level’s support was threatened for so long intraday that its break eventually required an accelerated pace. This seems to qualify.

– The morning’s “sudden, steep and substantial surge” had extreme optimism written all over it. If it were a corrective bounce, then its objective was a return to its origin at the 1086.00 open. It was met 15 minutes after the selling accelerated.

– Distribution targets created by the morning’s pattern at 1088.00 and 1084.75 were tested on the way down. Then the retest of Tuesday’s 1082.00 low. Once touched, they also needed to remain broken through the close for sellers to retain that traction. Tuesday’s 1082.00 low, too, for which there was no reason to have revisited it before Wednesday’s open unless the market intended to break lower.

– The low was 1072.50, nearly touching last Tuesday’s “lower prior highs” as support. While this area was representative of the next lower target, it certainly wasn’t foreseen that it would be met so soon. Frankly, last Wednesday’s ~1078.00 low was more likely to produce a bounce, either into the close or afterward, since it was pretty late in the day for an already sizable drop to also break big support.

So, that’s what Thursday comes down to. Was Wednesday’s drop the final chipping away at support needed to reverse the trend down? Not just seal a top, or “doom bounces to failure,” but extend the selling through Thursday morning. Or, perhaps Wednesday morning surge’s extreme optimism neutralized by the afternoon plunge’s excessive pessimism, as evidenced by the last-second dip under last Wednesday’s lows.

Notice the two new highs labeled “1” and “2” in the above chart. Notice the last high “3” originated from below both prior highs. A single leg fell back under the first two highs’ interim low. This setup can have a very bearish resolution. Overt and sustained strength Thursday would invalidate the setup, and probably point higher. Otherwise, the next leg is down.

Indicators and Internals.
3-minute RSI was persistently overbought throughout most of Wednesday morning’s surge, which made sell-off attempts unlikely, or unlikely to succeed. It was persistently oversold during the plunge. Perhaps not immediately, but eventually Wednesday’s low should be retested.

Thursday’s opportunities.
Lower lows at 1068.00 should be visited next, 10 points under Wednesday’s close. This regardless of whether they break into a much deeper and possibly steeply decline, or produce a bigger bounce into the past week’s range. A bigger bounce has room up to 1088.00 before this leg loses its traction and 1068.00 becomes unlikely. The econ calendar and my comments on it are at this link. [/pay]